19. INCOME TAXES

Income tax provision

The table below presents the components of income before income taxes as of June 30, 2012, 2011 and 2010:


	2012			2011			2010

South Africa	$	67,054		$	108,349		$	136,197
United States		(6,340	)		(15,053	)		(6,909	)
Other		(333	)		(56,886	)		(50,408	)
Income before income taxes	$	60,381		$	36,410		$	78,880

Presented below is the provision for income taxes by location of the taxing jurisdiction for each of the years ended June 30:


	2012			2011			2010

Current income tax	$	49,092		$	117,141		$	109,669
South Africa		26,787			38,882			47,225
United States		20,746			77,085			62,443
Other		1,559			1,174			1
Deferred taxation (benefit) charge		(4,598	)		(4,862	)		(2,770	)
South Africa		(2,941	)		(776	)		(441	)
United States		31			2,306			(1,236	)
Other		(1,688	)		(6,392	)		(1,093	)
Capital gains tax		1,465			-			-
Secondary taxation on companies		327			-			-
Change in tax rate		(18,315	)		-			-
Foreign tax credits generated – United States		(12,035	)		(78,754	)		(66,077	)
Income tax provision	$	15,936		$	33,525		$	40,822

The capital gains tax paid represents the taxes paid resulting from an intercompany capital transaction in South Africa during the year ended June 30, 2012. There were no capital gains taxes paid during the years ended June 30, 2011 and 2010, respectively.

The Company's South African subsidiary paid a dividend to Net1 after the tax law had changed but before the effective date of the South African dividends withholding tax which resulted in the payment of STC in the third quarter of the year ended June 30, 2012. For the first half of the year ended June 30, 2012, and in the years ended June 30, 2011 and 2010, the Company's effective tax rate included an accrual for STC and therefore any STC obligation arising during these periods was charged against the STC liability provided. This STC liability was released during the year end June 30, 2012, as a result of the change in tax law discussed below.

On December 20, 2011, there was a change in South African tax law to impose a dividends withholding tax (a tax levied and withheld by a company on distributions to its shareholders) to replace STC. The change was effective on April 1, 2012. As a result, the Company has recorded a net deferred taxation benefit of approximately $18.3 million in income taxation expense in its consolidated statements of operations during the year ended June 30, 2012. There were no changes to the enacted tax rate in the year ended June 30, 2011 and 2010.

As a result of the change in South African tax law and the Company's intention to permanently reinvest its undistributed earnings in South Africa, the Company does not believe it will be able to recover foreign tax credits previously recognized of $8.2 million. The movement in valuation allowance during the year ended June 30, 2012, includes a valuation allowance related to this foreign tax credits. The movement in the valuation allowance for the year ended June 30, 2011 relates to valuation allowances for foreign tax credits and the Net1 UTA valuation allowances related to its license ruling, tax deductible goodwill, and net operating loss carryforwards.

Net1 included actual and deemed dividends received from New Aplitec in its year ended June 30, 2012, 2011 and 2010, taxation computation. Net1 applied net operating losses against this income. Net1 generated foreign tax credits as a result of the inclusion of the dividends in its taxable income. Net1 has applied certain of these foreign tax credits against its current income tax provision for the year ended June 30, 2012, 2011 and 2010, respectively.

A reconciliation of income taxes, calculated at the fully-distributed South African income tax rate to the Company's effective tax rate, for the years ended June 30, 2012, 2011 and 2010 is as follows:


	2012		2011		2010
Income tax rate reconciliation:
Income taxes at fully-distributed South African tax rates	28.00	%	34.55	%	34.55	%
Permanent items	6.60	%	6.93	%	21.45	%
Foreign tax rate differential	7.22	%	5.46	%	0.24	%
Foreign tax credits	(21.12	%)	(209.00	)%	(82.70	)%
Taxation on deemed dividends in the United States	31.29	%	217.52	%	85.60	%
Capital gains tax paid	2.43	%	-%		-%
Secondary taxation on companies	0.54	%	-%		-%
Movement in valuation allowance	1.23	%	34.01	%	(5.02	)%
Prior year adjustments	0.53	%	2.61	%	(2.37	)%
Change in tax law	(30.33	%)	-%		-%
Income tax provision	26.39	%	92.08	%	51.75	%

The permanent items during the years ended June 30, 2012, relates principally to stock-based compensation charges, interest expense and an equity award issued pursuant to the Company's BBBEE transaction, which is not deductible for tax purposes. The permanent items during the years ended June 30, 2011 relates principally to interest expense and transaction-related expenditure which is not deductible for tax purposes. The permanent items during the year ended June 30, 2010, relates principally to impairment of goodwill which is not deductible for tax purposes.

Deferred income taxes reflect the temporary differences between the financial reporting and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The primary components of the temporary differences that gave rise to the Company's deferred tax assets and liabilities as at June 30, and their classification, were as follows:


	2012			2011
Total deferred tax assets

Net operating loss carryforwards	$	11,869		$	10,696
Provisions and accruals		2,450			2,715
FTS patent		1,436			1,831
Intangible assets		18,290			22,338
Foreign tax credits		19,089			22,566
Other		5,006			4,785
Total deferred tax assets before valuation allowance		58,140			64,931
Valuation allowances		(47,496	)		(45,866	)
Total deferred tax assets, net of valuation allowance		10,644			19,065

Total deferred tax liabilities:

Intangible assets		22,215			29,307
STC liability, net of STC credits		-			24,380
Other		3,826			2,281
Total deferred tax liabilities		26,041			55,968

Reported as
Current deferred tax assets		5,591			15,882
Long term deferred tax liabilities		20,988			52,785
Net deferred income tax liabilities	$	15,397		$	36,903

Decrease in total deferred tax assets

Net operating loss carryforwards

Included in total deferred tax assets – net operating loss carryforwards are net operating losses generated by MediKredit of $3.5 million. MediKredit net operating losses increased by $0.1 million during the year ended June 30, 2012, and a valuation allowance has been created against this amount. Net operating loss carryforwards also includes $6.7 million related to Net1 UTA. A valuation allowance has been created for the full amount of the Net1 UTA net operating losses.

Intangible assets

Included in total deferred tax assets – intangible assets as of June 30, 2012, is an intangible asset related to license rights in Net1 UTA. These license rights are termed software for Austrian tax purposes and were valued for Austrian tax purposes based on previous license payments at €50.76 million in June 2006. The Company expects to amortize the license rights in its tax returns over a period of 15 years. Any unused amounts are not carried forward to the subsequent year of assessment. During the years ended June 30, 2012 and 2011, Net1 UTA utilized approximately $0.04 million and $0.2 million, respectively, of these license rights against its taxable income and in 2011 expensed $1.2 million unutilized deferred tax asset. In addition, during the year ended June 30, 2011, the Company provided in full for this deferred tax asset and recognized an additional valuation allowance of $2.7 million. As of June 30, 2012, the gross carrying value of this deferred tax asset is approximately $9.6 million and there is a full valuation allowance.

Net1 Applied Technologies Austria GmbH ("Net1Austria") generated tax deductible goodwill related to the acquisition of Net1 UTA in August 2008 and under Austrian tax law Net1Austria can deduct up to 50% of the goodwill recognized, as defined under Austrian tax law, over a period of 15 years. Unused amounts are carried forward to subsequent years of assessment and are included in net operating loss carryforwards. During the year ended June 30, 2011, the Company provided in full for the deferred tax asset and recognized an additional valuation allowance of approximately $1.7 million. As of June 30, 2012, the gross value of this goodwill deferred tax asset was approximately $8.4 million and there is a full valuation allowance. The Company did not utilize the goodwill deferred tax asset during the years ended June 30, 2012 and 2011, respectively.

Decrease in total deferred tax liabilities

Intangible assets

Deferred tax liabilities – intangible assets have decreased during the year ended June 30, 2012, primarily as a result of the amortization of the underlying KSNET intangible assets during the year.

STC liability, net of STC credits

Deferred tax liabilities – STC liability, net of STC credits have decreased during the year ended June 30, 2012, primarily as a result of the change in South African tax law to replace STC with a dividend withholdings tax.

Valuation allowance

At June 30, 2012, the Company had deferred tax assets of $10.6 million (2011: $19.1 million), net of the valuation allowance. Management believes, based on the weight of available positive and negative evidence it is more likely than not that the Company will realize the benefits of these deductible differences, net of the valuation allowance. However, the amount of the deferred tax asset considered realizable could be adjusted in the future if estimates of taxable income are revised.

At June 30, 2012, the Company had a valuation allowance of $47.5 million (2011: $45.9 million) to reduce its deferred tax assets to estimated realizable value. The valuation allowances at June 30, 2012 and 2011, relate primarily to intangible assets including tax deductible goodwill (2012: $18.0 million, 2011: $22.1 million); foreign tax credits (2012: $19.1 million, 2011: $14.3 million); net operating loss carryforwards (2012: $9.6 million, 2011: $8.1 million) and the FTS patent (2012: $0.7 million, 2011: $1.1 million).

Net operating loss carryforwards and foreign tax credits

United States

As of June 30, 2012, Net1 had net operating loss carryforwards that will expire, if unused, as follows:


Year of expiration	US net
	operating loss
	carry
	forwards
2024	$	4,072

During the years ended June 30, 2012 and 2011, Net1 generated additional foreign tax credits related to the cash dividends received. Net1 had no net unused foreign tax credits that are more likely than not to be realized as of June 30, 2012 (June 30, 2011: 8.2 million). The unused foreign tax credits generated expire after ten years in 2022, 2021, 2020 and 2019.

South Africa and Austria

Net operating losses incurred in South Africa generally expire if a company does not trade during the year. In South Africa, the subsidiary companies that incurred the losses are currently trading and will continue to trade for the foreseeable future. Net operating losses incurred in Austria generally do not expire.

Uncertain tax positions

As of June 30, 2012 and 2011, respectively the Company has unrecognized tax benefits of $1.3 million and $2.7 million, all of which would impact the Company's effective tax rate. The Company files income tax returns mainly in South Africa, Korea, Austria, the Russian Federation and in the US federal jurisdiction. As of June 30, 2012, the Company's South African subsidiaries are no longer subject to income tax examination by the South African Revenue Service for periods before June 30, 2008. The Company is subject to income tax in other jurisdictions outside South Africa, none of which are individually material to its financial position, statement of cash flows, or results of operations. The Company does not expect the change related to unrecognized tax benefits will have a significant impact on its results of operations or financial position in the next 12 months.

The following is a reconciliation of the total amounts of unrecognized tax benefits for the year ended June 30, 2012, 2011 and 2010:


	2012			2011			2010
Unrecognized tax benefits - opening balance	$	2,664		$	1,460		$	1,060
Gross decreases - tax positions in prior periods		(1,159	)		-
Gross increases - tax positions in current period		97			1,233			368
Lapse of statute limitations		-			-			-
Foreign currency adjustment		(288	)		(29	)		32
Unrecognized tax benefits - closing balance	$	1,314		$	2,664		$	1,460

As of June 30, 2012 and 2011, the Company had accrued interest related to uncertain tax positions of approximately $0.03 million and $0.2 million, respectively, on its balance sheet.